July 26, 2006
Federal Reserve Districts
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Many segments of the First District economy continue to grow. Rising numbers of manufacturers and business services providers are increasing their selling prices, and some now report that competition for high-end workers is exerting upward pay pressures. Retailers indicate that their ability to raise prices remains spotty. Residential real estate sales volumes are slowing, and selling prices are flat to slightly down from a year earlier. With the exception of real estate and some consumer-oriented contacts, companies have a mostly positive revenue outlook for the remainder of 2006. However, many retailers and manufacturers mention downside risks related to rising business costs or eroding consumer purchasing power.
The majority of contacts observe higher-than-expected inventories, although one retailer reports keeping inventory levels very lean to maximize purchasing flexibility. A number of contacts report vendor price increases for petroleum-based products, but only a few have been able to pass on these increases to the consumer. Employment levels are mostly steady, with increases occurring only with the openings of new stores. Capital spending reports are mixed.
While many First District retailers are optimistic about the next few months, almost all express concern over rising energy costs and the effects of inflation and higher interest rates on consumer budgets.
Manufacturing and Related Services
Almost all of the respondents mention that inputs cost substantially more than a year ago, and some are expecting continued upward movements. Contacts point to copper and other metals, oil derivatives, packaging, inputs from China, energy, and fuel surcharges as sources of cost pressure, but several mention that natural gas prices have come in below expectations.
Almost all of the manufacturers contacted have raised their selling prices this year or plan to do so in the current quarter. The remaining contacts report that their selling prices have firmed after being under downward pressure. Many contacts indicate that their customers are accepting price hikes. For example, a couple of companies say they are factoring in the full amount of input cost increases when entering new contracts. One manufacturer reports that it is having greater success passing along energy price increases than earlier in the year, and another firm says its pricing capability is stronger than it has been for a couple of years. The companies reporting customer resistance to price hikes are mostly in chemicals and selected consumer goods industries.
Most manufacturers report that their U.S. headcounts are stable or edging downward. Base pay increases for 2006 mostly remain in the range of 3 percent to 4 percent, but some companies indicate growing pressures for higher raises, especially for professionals. Employers continue to report that openings in finance, accounting, supply chain management, and certain technical jobs are hard to fill. Most manufacturing respondents expect their domestic capital spending to be flat or increasing this year. The higher spending is chiefly for product development and reconfiguration of operations.
Most manufacturers have a positive revenue forecast for the remainder of 2006. Their concerns center around the impacts of high energy costs and rising interest rates either on their own costs or on the economy at large.
Selected Business Services
Contacts note that travel expenses continue to climb and the prices for market data have increased. The ability of business services firms to raise prices has been mixed; some firms say that their selling prices are increasing a little with limited or no push-back, while those that are keeping pricing stable report that they face less downward price pressure than previously.
A majority of New England consulting contacts plan to increase their headcounts in 2006. The labor market for experienced consultants continues to tighten, and a few contacted companies note that they are beginning to experience difficulties filling vacancies in fields such as finance and sales. Advertising and marketing firms report no plans to change headcounts. Wage increases at business services companies range from 2 percent to 10 percent, with consulting firms reporting raises on the higher end of the range. One consulting contact reports that people are seeing low- to mid-single digit increases on average, but their "stars," who have an increasing number of outside offers, are asking for--and getting--low-double digit raises.
Most respondents expect revenue growth to remain the same or accelerate slightly over the remainder of 2006, although a few contacts caution that they have limited visibility beyond the third quarter.
Residential Real Estate
Contacts attribute slower regional sales to increasing mortgage interest rates, a lack of both buyer and seller urgency, and unwillingness on the part of sellers to reduce asking prices. Certain areas of New England have seen downward movement in sales prices. In Massachusetts, median single-family home prices declined 0.3 percent and 1.2 percent in April and May, respectively, compared to the year before. Median condominium prices declined 2.5 percent year-on-year in April but increased 2.5 percent in May.
Contacts project modest price decreases for the year in single family homes in Massachusetts and no price appreciation for condominiums. They also believe the sales pace will continue to slow. Despite softening sales and cooling prices, contacts remark that sales volume in 2006 is still slated to be one of the highest on record.